New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on May 9, 2006 representing the position of the New York State Insurance Department.

Re: Director’s and Officers Liability Insurance and Legal Services Insurance.

Question Presented:

May an insurer licensed to write liability insurance provide defense-only coverage in a directors & officers insurance policy if the insurer is not also licensed to write legal services insurance?

Conclusion:

No, an insurer licensed to write liability insurance may not provide defense-only coverage in a directors & officers or other liability insurance policy if the insurer is not also licensed to write legal services insurance.

Facts:

No specific facts are provided. This is a general inquiry regarding whether an insurer may provide defense-only coverage under a directors & officers insurance policy. The policy provision in question would exclude any duty of the insurer to indemnify the insured for a claim involving fraud but would provide a defense for the insured until there was a final adjudication of the claim. The inquirer said that an insurer advised him that the insurer needed a special license to provide the coverage but it did not have the license and that the Department would not approve a liability policy with such a clause unless the insurer had such a license.

Analysis:

N.Y. Ins. Law § 1113(a)(13) and (14) (McKinney 2000 & Supp. 2006) define both "personal injury liability insurance" and "property damage liability insurance" to mean "insurance against legal liability of the insured, and against loss, damage or expense incident to a claim of such liability…" The emphasized clause was added when the Insurance Law was recodified in 1939. As stated in Revised Insurance Law of New York, Kaplan and Gross (1940):

The provision covering "expense incident to a claim of such liability," as set forth in this definition, is new, and was designed to include the usual provisions whereby the insurer agrees to provide for the defense of an action brought against the insured, and to furnish all services and expenses incident thereto.

When the allegations against the insured include both acts for which there is liability coverage and acts for which there is no liability coverage or where such coverage is specifically excluded, the insurer is responsible for defense of the entire action. See Seaboard Surety Company v. Gillette Company, 64 N.Y. 2d 304 (1984). However, where the allegations of a complaint are solely and entirely outside the liability coverage under the policy, then no defense may be provided under a liability insurance policy because such a defense is not "incident to a claim of such liability" as required by Insurance Law Section 1113(a)(13) and (14).

In recognition of the perceived need to permit insurers to provide a defense to a person for acts for which the insurer may not provide indemnity coverage, in 1998, when authority for insurers to write prepaid legal services plans pursuant to N.Y. Ins. Law § 1116 was extended, the Department added legal services insurance as a new kind of insurance in N.Y. Ins. Law § 1113(a)(29). As provided in N.Y. Ins. Law § 1116(a)(3) (McKinney 2000 & Supp. 2006),

Legal services insurance may not be written except (i) in conjunction with prepaid legal service plans as authorized in [§ 1116], or (ii) pursuant to a regulation promulgated by the Superintendent permitting legal services insurance to be written as part of a policy of liability insurance covering related risks and, provided further, that legal services insurance for defense only coverages for commercial or other business related lawsuits or arbitration proceedings commenced against the business entity that purchased the policy is not more than an incidental part of such liability insurance.

The Superintendent promulgated 11 NYCRR 262 (Regulation 162), one purpose of which was to authorize legal services insurance to be offered in conjunction with a liability insurance policy. As provided in Section 262.4:

(a) No policy may provide defense-only coverage for a legal liability of the insured if the legal liability may permissibly be covered under a policy of liability insurance in this state.

(b) Legal services insurance may provide for the payment of defense-only costs in relation to a claim of legal liability where a liability insurance policy cannot provide coverage for the legal liability of the insured because the coverage is against public policy or otherwise not permitted under the Insurance Law, such as a claim relating to dishonest or fraudulent acts, intentional violation of statute, or the intentional gaining of profits to which the insured was not legally entitled.

With respect to directors and officers insurance policies, § 262.6 provides:

A directors and officers liability insurance policy that provides coverage for the acts of an officer or director of a corporation, as such term is defined in paragraph (1) of Section 262.5(b) of this Part, shall not provide coverage where indemnification is not permitted pursuant to the Business Corporation Law, Not-for-Profit Corporation Law, Banking Law or other applicable corporate statute.

In order to write legal services insurance in New York, an insurer must be so licensed. Hence, an insurer that is authorized to write liability insurance but is not also authorized to write legal services insurance may not provide the defense-only coverage for fraud.

According to the Department’s records, the inquirer's company is licensed as an excess line broker. It should be pointed out that an excess line broker may not place legal services insurance because excess line brokers are not so authorized pursuant to N.Y. Ins. Law § 2105(a) (McKinney 2000 & Supp. 2006).

For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.